Q&A: Circulate Capital's Rob Kaplan

Q: How did you come to set up Circulate Capital?

A: We started in 2017 as a kind of landscaping project. I was a managing director at Closed Loop Partners, a circular economy investor in the US, when a number of large corporates asked us to think about an emerging markets strategy. At the time, the Ocean Conservancy had just come out with some science that found that most of the plastic entering the world’s ocean comes from just a handful of countries in South and Southeast Asia. And they found that if we could invest in waste recycling and the circular economy in those regions, we could cut that flow of plastic into the environment in half. By March-April 2018, the topic had exploded, and it was no longer just landscaping – it was the number-one priority for our corporate partners.

Q: What motivates your corporate LPs?

A: They recognize the scale of the problem. Their packaging and products are ending up in the environment, and they don’t want that. They also realize that large amounts of capital are required, much more than any of them could provide on their own. They don’t have the expertise to deploy that kind of capital directly, and the recycling business is not really what they do, so we designed this strategy together. It’s also a supply chain resiliency investment for them. They get access to the quality and quantity of recycled material needed in these regions that wasn’t readily available to them before for use in new packaging.

Q: Why was a private equity fund the preferred approach?

A: If we had asked them for a grant as a philanthropic program, it would have been limited by historical levels of such contributions. Setting it up as an equity investment in a limited partnership allowed us to unlock much more capital. But in many ways this fund is just a drop in the ocean because we need many billions of dollars to be invested in this sector. That’s not going to come from corporates alone. It’s going to come from institutional investors financing the future of infrastructure in Asia, and they don’t get on board just to solve a problem, they do it for a financial return. Our plan is to prove the strategy can generate returns and unlock that institutional capital over time.

Q: What are your return expectations?

A: We have set this fund to achieve a below-market IRR in the mid to high single digits, but we’re holding ourselves to a standard that we do due diligence for every investment for a market rate of return. As a portfolio trying to achieve impact in a sector that has never really seen a successful investment strategy against it in this region, we’re taking on a lot of risk. At the end of the day, our LPs are interested in solving this problem, not necessarily just beating the market.

Q: Is Circulate an impact investor?

A: To be honest, it depends who I’m talking to. It’s a bit of a loaded word. For some people, it helps you understand what we’re trying to achieve, and for others, it can stick you in a box of being more philanthropic than financially minded or returns minded. So we are cautious about calling ourselves an impact fund. Of course, we do have impact goals and targets just like we have financial return goals and targets. But we don’t think they’re mutually exclusive. They’re integrated into everything we do.

Q: What’s the scope of the problem you’re targeting?

A: There are about 150 million tons of plastic in the ocean right now, and by all accounts that’s probably an underestimate. That grows by about 8 million tons a year, which is the same as a garbage truck full of plastic backing up to the ocean and dumping its load every minute. At this rate, there will be more plastic than fish in the sea in terms of weight by 2050. The big thing the Ocean Conservancy did with their research was figure out where to start. You can make a real dent in that 8 million tons a year in South and Southeast Asia. That’s what inspired us to do this.

Q: How did we get here?

A: There just hasn’t been a lot of municipal waste management budget allocation and prioritization by governments in South and Southeast Asia because they’ve had other big problems and priorities on the list, and that’s especially true with COVID-19. Meanwhile, they’ve seen incredible growth in consumption, development, and waste generation over the past 10 years, and they don’t have the capacity to invest at the same pace in this kind of infrastructure. Compare that to the US and Europe, which had 100 years to slowly invest in waste management as they grew. We don’t have that luxury here, so the private sector has a unique opportunity – and in our case responsibility – to make a system that works.

Q: How will this be achieved?

A: In most cases, waste collection in that first stage of engagement in households is a municipal role. Sub-national governments own that kind of role, and it’s not something that they’ve really engaged with too much. So in the meantime, we have to build new value chains around that. The US and Europe have failed models in this regard. The US recycles about 9% of its plastic. It doesn’t end up in the environment, but landfilling is not much of a victory. This is where Asia has the opportunity to leapfrog what’s been done in the US and Europe by not thinking of waste management only as a municipal service but as an engine for economic development and job creation.

Q: How does COVID-19 impact your mission?

A: We see a lot of opportunity, but the patterns of growth in Asian affluence and consumption will change, and we don’t know exactly how. Everyone is talking about this new normal, but no one really knows what impact it will have. We still feel really positive about our strategy, however, because we’re investing in things like essential services, local economies, resiliency, and sustainable industries and supply chains. These are topics that have been talked about for a long time but not really prioritized until now. You’ll see more of those kinds of things as we come out of this crisis.

Q: What’s your impression of the start-up community so far?

A: There’s a lot of demand for capital. We made our first investments in April with Lucro, an Indian company that recycles flexible plastic, and Tridi Oasis, an Indonesian business that recycles plastic bottles. I remember our first conversation with Lucro, they remarked that this was the first time they sat down with an investor who didn’t need an hour-long primer explaining the recycling industry. If you asked a room of people in the broader private equity space who has experience in solar or water, few hands would be raised. Ask how many people in private equity have experience in recycling, and you don’t see a lot of hands.

Q: Is it a coincidence the first two deals were both in recycling?

A: It’s the easiest area to do due diligence and get excited about. We do consider ourselves a full value chain investor, however. The plastics value chain also includes innovative materials that could replace single-use virgin petroleum-based plastics and business models based on returnable or reusable. You’ve got a few phases that get blurred together: collection, sorting, aggregating, processing, and manufacturing with recycled materials. The processing stage is where most of the short-term opportunity is and where we have the most value-add.

Q: Where are the biggest challenges?

A: Collection is a massive need because you can’t recycle it if it’s not collected. That’s the front line for this and where the informal sector creates strengths and challenges. The strength is that the market in Asia is responsive. If I say I’m going to start paying 10 times as much for recycled bottles in the US, no one would change their behavior and not a single city would change the way it collects or manages waste. In Indonesia or the Philippines, armies of people who make their livelihood off that would respond. But there are challenges baked into that with at-risk populations, child labor, and other social concerns that make engagement difficult.

Q: What are the considerations of investing in waste management in a software-dominated start-up ecosystem?

A: In the incubators, accelerators, and co-working spaces, there’s not much of a community for hardware start-ups, but that makes a company like Tridi Oasis, where you have two women building a manufacturing business, unique and exciting. You’re investing in business models that are based on cost savings and smart growth rather than acquiring customers as quickly as possible. It means IPOs are unlikely and exits will probably come through private equity rollups, M&A, or being bought out by the entrepreneurs. As investors, we need a much lower failure rate, and we need to spend a lot more time supporting the portfolio.

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• Topics
• Southeast Asia
• Cleantech
• GPs
• Singapore
• Circulate Capital